4
Variable Costs Costs that change in proportion to changes in volume or activity At restaurants, food costs vary with the number of customers served For airlines, fuel costs vary with the number of miles flown Example Activity increases by 10% Cost increases by 10%

30
Cost-Volume-Profit Analysis Break-Even Point Number of units sold that allow the company to neither a profit nor a loss $0 = SP(x) – VC(x) – TFC Margin of Safety Difference between expected sales and break-even sales

37
Gabbys Wedding Cakes creates elaborate wedding cakes. Each cake sells for $500. The variable cost of baking the cakes is $200 and the fixed cost per month is $6,000 1.Calculate the break-even point for a month. 2.How many cakes must be sold to earn a monthly profit of $9,000?

39
Multiproduct Analysis Contribution Margin Approach Used if products are similar Identify number of units needed to be sold to break even Calculate weighted average contribution margin based on expected units sold

40
Multiproduct Analysis Contribution Margin Ratio Approach Products are substantially different Identify dollar amount of sales needed to break even Calculate total CM Ratio and use to determine break-even point

41
Assumptions in CVP Analysis Costs can be accurately separated into fixed and variable components Fixed costs remain fixed Variable costs per unit do not change

42
Operating Leverage Level of fixed versus variable costs in a company High level of fixed costs has a high operating leverage Typically have large fluctuations in profit when sales fluctuate

43
Outsourcing

44
Constraints Constraints on how many items can be produced Shortage of space, equipment, or labor Utilize contribution margin per unit to analyze situations

45
Decisions that Increase Sales or Production

46
Rhetorix, Inc. produces stereo speakers. The selling price per pair of speakers is $800. The variable cost of production is $300 and the fixed cost per month is $50, Calculate the contribution margin associated with a pair of speakers. 2.Calculate the contribution margin ratio for Rhetorix associated with a pair of speakers.